NYS budget retirement sweeteners will add costs for local governments

State lawmakers, in an election year, made adjustments to sweeten retirement benefits for public workers hired after 2011 — changes that could help Democrats with their campaigns, but also increase costs for local governments and schools, experts say.

Gov. Kathy Hochul and her Democratic colleagues, who hold a majority in the State Legislature, in April approved a $237 billion state budget for 2024-25 that included tweaks to Tier 6 of the state retirement system.

The adjustments, aimed at attracting workers and retaining those hired on or after April 1, 2012, essentially increase the level of benefits public workers receive when they retire and keep employee contribution rates low for those who earn overtime pay.

Statewide, there are approximately 703,000 members of Tier 6, including government workers, teachers, firefighters, police and health care workers at public hospitals such as Stony Brook University Hospital and Nassau University Medical Center, according to 2023 data from the state Comptroller's Office, state Teachers' Retirement System and the New York City Office of the Actuary.

Public employee unions across the state applauded the changes as long overdue.

“It marks a momentous stride toward restoring fairness and retaining invaluable public sector workers,” Mario Cilento, president of the New York State AFL-CIO trade union, said in a statement following the budget’s passage.

But fiscal government watchdog groups warn the changes will increase contribution costs for state and local governments, some health facilities and school districts by millions of dollars, and continue to rise annually.

The salary calculation shift will cost public employers an estimated $377 million this year, according to the budget legislation.

“Pension costs are going to go up and local governments and school districts are going to have to choose between increasing taxes to cover those cost increases or reducing services,” said Ken Girardin, director of research for the Empire Center for Public Policy, a fiscally conservative think tank in Albany.

Union leaders and some state lawmakers say the increase to employers is relatively minor.

“What we’ve heard from most is that it’s worth it and that it’s an essential investment,” said Melinda Person, president of New York State United Teachers, the state’s largest teachers union with nearly 700,000 members.

Providing a win for unions in a year in which members of Congress and all 213 members of the State Legislature are up for election is a “smart move,” Hank Sheinkopf, Manhattan-based political strategist who has worked for Democrats and Republicans, told Newsday.

New York Democrats will want to undo the “disaster” of 2022, he said, when Republicans flipped four congressional seats in the state, helping the GOP earn a majority in the U.S. House. Democrats also are concerned about the possibility of taking back suburban seats in Nassau and Suffolk counties, he said.

“The unions provide manpower and they write checks, and both are needed in election years,” Sheinkopf said. “Political costs outweigh economic costs.”

Tier 6 changes

Retirement tiers are created when large changes are made to the state’s pension system that would, for example, increase employee contribution rates for new members or decrease benefits.

Tier 6 was put in place in 2012 to reduce pension costs that had exploded due to a combination of people living longer, the stock market not doing as well and changes to the system made in 2000 that let many public employees stop contributing after 10 years, Girardin said.

It also made employer contribution costs more predictable, said Patrick Orecki, director of state studies for the independent Citizens Budget Commission, which analyzes state spending.

The recent Tiers 5 and 6 have made the once-coveted state pension system less desirable, deterring people from entering and staying in public service, union leaders said.

The unions have had success getting legislative adjustments to Tiers 5 and 6 in recent years and will continue to push for “tier equity,” Person said. 

Tier 6 takes into consideration the highest five consecutive years of an employee’s salary, usually the last five years of employment, to determine their retirement benefits. The budget changes it to three years, effectively increasing the amount public workers receive once they retire, experts said. 

The budget also continues to exclude some overtime from being part of the calculation for employee contributions, essentially lowering employee contribution rates for some workers who may otherwise have had a higher rate due to overtime hours being taken into consideration, experts said. 

Not everyone is convinced the tweaks will help.

“There has been a lot of turnover economywide and in every job title. I don’t think this is something that changes the landscape for public employees,” Orecki said. “Of the things that the state could be spending more money on, this is not the highest value.”

The New York State School Boards Association has been focusing on other ways to increase recruitment and retention, such as changes to Civil Service barriers, Brian Fessler, the association's director of governmental relations, told Newsday.

“We think there are more effective and certainly more cost-effective ways to get at that challenge other than these pension reforms,” he said. 

Rising costs

There are eight public retirement systems in New York — three systems covering state and local workers outside of New York City and five systems covering public workers in the city.

The calculation shift will add about $25 million in additional employer contribution costs for New York’s 57 counties and $196 million annually for New York City — and will increase each year — according to the New York State Association of Counties.

The association did not respond to a request for comment about the increased costs, and the New York Conference of Mayors declined to comment.

The bulk of school district employees outside of New York City are members of the state Teachers' Retirement System — contributions for which are expected to increase by an estimated $23.1 million this year, according to the budget. 

Long Island districts may have larger employer costs with teachers typically earning higher salaries to match the high cost of living, Fessler said. There are nearly 27,000 Tier 6 state Teachers' Retirement System (TRS) members on Long Island, according to 2023 TRS data. 

The increased mandated retirement costs, along with the potential for decreased school aid because of future changes in the funding formula, among other factors, are all putting pressure on school district finances, said Brian Cechnicki, executive director of the Association of School Business Officials of New York.

“It’s definitely something we need to be thinking about,” he said.

There are differing opinions on public employers' abilities to handle the increase.

State Comptroller Thomas DiNapoli in a statement to Newsday said the pension plan is “well funded and well positioned to manage the impact.”

Hochul’s office pointed to increases in the state budget, including $50 million in aid for municipalities over two years, $35.9 billion for school aid and $3.2 billion to support hospitals, which could help offset the contribution increase.

Girardin said much of the aid to local government is going to be gobbled up by the increased pension costs.

State lawmakers tried to balance the potential costs with the benefits when making the changes, said Assemb. Fred Thiele Jr. (D-Sag Harbor), who chairs the Assembly Committee on Local Government.

“I think we listened to local government and tried to find that sweet spot, which might have given them an additional tool for recruitment and retention without having it incur major costs that they couldn’t afford,” he said.

Thiele said they’ll continue to keep an eye on the costs.

“I suspect it’s a work in progress. We’ll see how this change goes,” he said.